According to CryptoQuant data on May 10, Bitcoin reserves on centralized exchanges such as Binance and Coinbase experienced a significant decline in Q4 2022. Reserves remained stable in April despite prices rising from $20,000 to $31,000 at that time.
Bitcoin Reserves Exchange Rapidly Shrinking
Bitcoin exchange “reserves” is a metric that tracks the amount of BTC held by centralized exchanges at any given time. Often, the interaction between coin holders and exchanges can be used to gauge sentiment and their expected coin price in the near future.
An example of falling reserves is when there is a sudden outflow from the exchanges. This may indicate that users are optimistic and store their assets in non-custodial wallets. However, it is important to note that this does not always cause flows. It can also be caused by fundamental reasons such as hacks or regulatory concerns – as Binance recently saw.
On the contrary, the flow of Bitcoin to the exchanges can increase the reserves on the ramp. However, this is interpreted as bearish because holders can easily liquidate their holdings for cash or stablecoins.
With Bitcoin reserves falling on centralized exchanges, this could mean that traders expect prices to rise soon. In Q4 2022, the total reserves of Bitcoin exchanges in all tracked ramps fell significantly, especially in November 2022. This is consistent with the collapse of FTX and questions that have arisen about the stability of Binance and others more centralized exchanges.
Binance, the world’s largest cryptocurrency exchange, has led other platforms in publishing proof-of-reserve statements to ease fears and restore confidence. Although reserves are improving, there will be a marked decline in late March 2023.
Then, the bank run by Silicon Valley Bank (SVB) and the closure of Signature Bank, banks that serve crypto projects, including Circle, the issuer of USDC, appear to have triggered coin outflows. From March 20 to early April, the Bitcoin exchange reserve fell from 2.2 million to 2.1 million.
Will BTC rally?
The overall trend in Bitcoin exchange reserves remains negative, and prices are relatively stable, trading below $31,000.
While this correlation between the rise in prices and the drop in exchange reserves is still valid, if the regulatory actions against crypto exchanges will cause a divergence remains to be seen.
Binance is reportedly being investigated by several United States agencies, including the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).
The CFTC alleged that Binance, the world’s largest exchange, violated the country’s trading laws. However, whether charges will be brought forward is determined in writing.
Any official charge could destroy users’ confidence in the exchange, potentially causing massive outflows and depleting BTC reserves.
Feature Image From Canva, Chart From TradingView